Thursday, January 12, 2012
Posted by D. Daniel Sokol
Marie-Laure Allain, Claire Chambolle and Patrick Rey have a working paper on Vertical Integration, Innovation and Foreclosure.
ABSTRACT: This paper studies the potential effects of vertical integration on downstream firms’ incentives to innovate. To interact efficiently with suppliers, firms may have to provide sensitive information which, if disclosed to rivals, could facilitate imitation. We show that, by altering the supplier’s incentives to protect or exploit its customers’ information, vertical integration degrades the supplier’s ability to interact with downstream competitors. This leads to input foreclosure, raises rivals’ cost and limits both upstream competition and downstream innovation and development. A similar concern of customer foreclosure arises in the case of downstream bottlenecks.